Perfect Competition Flashcards
assumptions
many firms and consumers
good is homogenous
free entry and exit in the long run
firms seek to maximise profit, and consumers seek to maximise utility
perfectly competitive markets (almost)
some agricultural produce
retail market for petrol, especially if we speak of one type of petrol, but supply side dominated by handful of large brands
the secondary market for a particular share e.g. bhp, woolies
firm’s market in perfect competition
the firm has to share the market demand with every other firm in the market, and because it is too small to have any effect on the market it is known as a price-taker
means the firm has no choice but to accept the market price of the good, which is determined by total market demand and supply
the firm has to accept P0 as the market price and do the best they can, given this price
profit maximisation through marginal analysis
the firm will increase output as long as each additional unit sold adds more to total revenue than to total cost
a firm will maximise profit at the level of output where MR = MC
types of profit
pure economic profit: P > ATC
zero (normal) economic profit: P = ATC
economic loss: ATC > P > AVC
shut down: P < AVC
economic profit
if the demand curve is positioned above ATC, partly inside the ATC bowl, then the firm will be able to earn some positive economic profit
normal profit
if the demand curve is just tangent to ATC (just touching at minimum), then the firm will at best earn normal profit
normal profit does not mean that the firm is making no accounting profit
quasi-loss
if the demand curve is positioned below the ATC, then the firm will be make a loss. however, if the demand curve is positioned above AVC the firm will be making a quasi-loss
shut down
if the demand curve is positioned below the AVC, then the firm will shut down immediately
